In health policy debates in recent years, a range of different models have been proposed for reforming the Australian health system. When presented in isolation, these models can be confusing, particularly for those for whom the health system is unfamiliar territory.

As such, this Background Note is intended as a guide to some of the main recent proposals for health reform. The Note focuses on the main features of each model and seeks to explain what problems they are intended to address and how they differ from one another. The Note also highlights some of the main criticisms that are made of each.

Commonwealth and state responsibilities

The division of responsibilities for health care between the Commonwealth and state/territory governments is complex: there are many types of providers of services, and a range of funding and regulatory mechanisms.

Broadly speaking, however, the major divisions of responsibility in the Australian health care system are as follows:

the Commonwealth government’s major contributions to the health system include:

two national subsidy schemes, Medicare, which subsidises payments for services provided by doctors, and the Pharmaceutical Benefits Scheme (PBS), which subsidises prescription medicines

shared responsibility for funding for public hospital services through the Australian Health Care Agreements (AHCAs) with the state and territory governments[1]

subsidisation of private health insurance through rebates on the cost of private health insurance premiums (35 per cent for those aged over 65, 40 per cent for over 70s, and 30 per cent for all others)

funding for a range of other health and health-related services, including public health programs, residential aged care, and programs targeted at specific populations, and

regulation of various aspects of the health system, including the safety and quality of pharmaceuticals and other therapeutic goods, and the private health insurance industry.

the state and territory governments’ major contributions to the health system include:

management of, and shared responsibility for funding, public hospitals

funding for and management of a range of community health services

management of ambulance services, and regulation of various aspects of the health system, including licensing and registration of private hospitals, medical practitioners, and other health professionals (a national registration scheme is due to commence in 2010).

The existing division of responsibilities in health in Australia creates the potential for cost-shifting between different levels of government, and gives rise to frequent claims of blame-shifting and buck-passing.[2]

For example:

it is often argued that the division of responsibility, whereby the states and territories run public hospitals and the Commonwealth runs the aged care system, allows the Commonwealth to under-fund aged care in the knowledge that the states will fund the costs of those waiting in public hospital beds for access to the aged care sector. According to one estimate, this costs Australian taxpayers an extra $580 million per year[3]

it has also been argued that there is an increasing trend for public hospitals to discharge patients after fewer bed days than in previous years for similar procedures—with the patient being provided with a prescription for medication to be taken at home. This being the case, the cost of treating a patient would shift from the states (responsible for public hospitals) to the Commonwealth (responsible for subsidising the cost of pharmaceuticals through the PBS)[4]

similarly, while many public hospitals offer specialist care through out-patient clinics, they are reluctant to promote their use because of the costs associated with running them. Instead, they prefer that patients seek specialist care outside the hospital system, where the Commonwealth government would pick up the cost under Medicare[5]

another example of cost shifting (or the potential for cost shifting) and blame shifting between the Commonwealth and the states is the interface between the primary and public acute care sectors. For example, in relation to the provision of primary care (GP style) services, some commentators have argued that declining bulk billing rates mean that access to and affordability of, GP services is compromised. Subsequently, it is argued, people who cannot afford to pay for GP services present at emergency departments seeking GP-style care, putting pressure on the public hospital system. State/territory governments and other commentators argue that increases in waiting times in emergency departments are the result of the Commonwealth under-funding the primary care sector.[6]

Governments in many countries began making substantial reforms to their health systems from the mid-1970s onwards, after it became clear that economic prosperity was not guaranteed and budget austerity was likely to be permanent.[7] Since the 1990s, reforms have tended to involve a shift away from state intervention, the promotion of competition among health service providers and the greater use of market mechanisms.

In the last decade, health system reform in Australia has been on the political agenda. Although Medicare enjoys widespread support, it is under pressure because of changing demographics, the growing burden of chronic diseases, rising health care costs associated with medical advances and better technology, and higher public expectations. A House of Representatives Standing Committee on Health and Ageing inquiry into health funding in Australia detailed some of the challenges the health system faces in its recent report The Blame Game.[8] They include:

duplication and waste because both the federal and state governments have a role in funding health care

cost shifting

the interdependence of the public and private sectors (which leads to some confusion about the role of private insurance in the context of a compulsory, universal health insurance scheme such as Medicare)

funding arrangements that have a bias towards treating illness instead of preventing it

a lack of financial incentives to deliver high quality and safe health care

Managed competition is a market-oriented system that aims to induce cost control by separating the financing, insurance and third party payer functions from the provision of health services.

Under this system, governments fund competing third party payers (or fund holders) who then purchase health services from competing providers on behalf of enrolees. The amount of money received by each fund holder is determined using risk-adjusted population data (this involves using health outcome data to determine the overall health of a specific population). Budget holders and health care providers can be from the public or private sectors.

Managed competition is often confused with managed care. Managed care, however, is a more general term that refers to any health system where the payer seeks to exercise control over the choice of provider, cost, quality, and appropriateness of care.[9]

Two proposals have been made to implement managed competition into the Australian health care system in recent years. Each is considered briefly below.

Richard Scotton, formerly of Monash University and co-architect of the original Medibank scheme, proposed a managed competition model for Australia in 2002.[10] This model proposes to consolidate all health programs into one (including Medicare, the PBS, public hospitals, nursing home benefits, mental health and other health programs). The federal government would then assume complete responsibility for health. Funding would continue to come through taxation, the health insurance levy and co-payments.

To implement it, Australia would be divided into health regions, each with its own risk-adjusted rating calculated using health outcome data. Regional budget holders would receive grants directly from the federal government and in return would be responsible for contracting out the provision of all health services to registered enrolees. It would be possible to cap funding levels, thereby providing strong financial incentives to deliver cost effective services.

Competition is a key feature of this proposal, but it operates under a framework that preserves a commitment to equity and universal access to care. Citizens in each region would be able to choose between public and private budget holders and health service providers, thus stimulating competition, promoting efficiency and more appropriate delivery of services in the region.

Flexibility is also a key feature as each region would be able to offer health services tailored to the needs of enrolees.

This model was proposed by Andrew Podger, former head of the Commonwealth Department of Health and Ageing.[11] It shares many features with the Scotton model, including a federal government take over of health, and the use of regional fund holders with risk-adjusted profiles. However, it differs from the Scotton model because it advocates allocating regional budget holders a ‘soft-capped’ budget. Regions that overspent on their budget would be subject to a performance review rather than having financial penalties imposed on them.

Health service provider arrangements under this model would remain relatively unchanged, but a greater emphasis would be placed on funding according to case-mix data (a system of funding that pays hospitals according to the number and type of patients treated, not the resources used). It is assumed that this funding system would prompt hospitals to contract out some services, develop centres of excellence in order to improve efficiency, and improve co-operation with community based services.

Many are sceptical about the viability of managed competition models in Australia, particularly because of experiences with similar models in the United States of America (US). Some concerns about managed competition raised by participants at a Productivity Commission Workshop (where Scotton outlined his proposal) included:

large scale reform is required, which is very difficult to achieve

the benefits of managed competition are still uncertain

competition could lead to increased costs based on increased use of sophisticated technology

it would be difficult to sustain competition in rural and remote areas

it is likely to meet strong resistance from various groups, including doctors, because it involves major changes to the organisation, funding and delivery of health care services.[12]

MSAs are like personal saving accounts with funds ear-marked for health care expenses. Depending on the particular model of MSA, expenses covered could include hospital care, out-of-hospital services (e.g. GPs, specialists), medicines, aged care and other services. Individuals contribute to their accounts over time. Governments and employers may also make contributions. Individuals bear the risk of ill health alone, as opposed to insurance schemes where the risk of ill health is shared among the entire insured population. Individuals are also the fund holders and determine where, when, and what health services are used. They are free to choose between public or private sector providers.

MSAs are thought to induce cost savings because individuals are more price sensitive and tend to use fewer unnecessary services as well as more cost-effective services, such as prevention.[13] The other main argument used in favour of MSAs is that they provide a mechanism for saving for the expected high costs of future health care and, more broadly, mobilise an additional source of health funding.

Over the last decade, proposals that consideration be given to introducing MSAs in Australia have been made by the Australian Medical Association, Medicines Australia, Paul Gross (CEO, Institute of Health Economics and Technology Assessment) and others.[14]

Economists have produced evidence from China, Singapore and the US showing that MSAs do not lead to cost savings[15]

Other economists have found that MSAs do lead to costs savings, but only when they are compulsory, provide assistance to specific groups of people (e.g. the unemployed or low income), impose some supply side controls and have strong government stewardship[16]

MSAs are not effective instruments for financing the health expenses of the chronically ill and poor (both of whom tend to deplete their accounts more quickly than they can add to them and therefore require some form of safety net).[17] As such, adoption of MSAs would most likely imply a shift to a two tier health system—a situation at odds with Australia’s current universalist approach under Medicare.[18]

This proposal was made recently by Professor Jim Butler from the Australian Centre for Health Economic Research.[19] One of its main aims is to clarify the role of private insurance in Australia. At present, private insurance does not function purely as a substitute for Medicare (patients with private insurance, for instance, are still entitled to be treated in public hospitals). Nor does it function simply as a top up to Medicare (private insurance covers the full cost of treatment in a private hospital, not just the amount over and above what Medicare covers).

This proposal advocates abolishing federal government grants to hospitals and the private health insurance rebate and replacing them with a Medicare Hospital Benefits Scheme (HBS).

The HBS would require:

the federal government to fund a hospital benefit at a pre-determined amount

paying the benefit for each hospital episode (not on a per diem basis). States would continue to own and run public hospitals

Under the scheme, each HBS item would have a set rebate. It would operate much like the Medical Benefits Schedule, which lists the medical services subsidised by the Australian government. The rebate would be set at a level to ensure public patients in public hospitals did not face out of pocket costs. Hospital benefits would be completely transportable between public and private hospitals. Private hospitals would have the option of bulk-billing or charging rates in excess of the HBS. Private health insurance funds would be restricted to providing cover for the gap, i.e. fees in excess of HBS, thus limiting their role to topping up Medicare and covering ancillaries such as dental, optical and allied health services.

Doctors would be paid on a fee for service basis in both the public and private sectors. This, however, poses the problem of ensuring public patients do not face out of pocket costs as doctors are able to determine their own fees structures.

Under this system, proposed by Ian McAuley, lecturer in public finance at the University of Canberra, Australia would move towards a single, national, public insurer, funded through Medicare. A single national insurer would have an incentive to reduce health care utilization and impose cost controls as any benefits would accrue to the insurer. It would also have market power to impose utilisation and cost control, and would be able to exercise some degree of market discipline by requiring co-payments.[21]

For McAuley, the case for a single national insurer arises from what he sees as intrinsic problems with having a large number of insurers in the market (there are currently 38 private health insurers operating in Australia). These problems include ‘the under-provision of public goods which can reduce insurance claims (particularly public health initiatives), the incapacity of insurers to control price and utilization, and the moral hazard associated with insurance’.[22] McAuley contrasts this with the idea of a single insurer, which he says can have a great deal of control over price and utilisation (he sees as an example the PBS’s success in using its purchasing power to keep pharmaceutical prices and utilization in check).[23]

Under this system, health care would continue to be delivered by both public and private providers. Private health insurance would play either a very minor role (as in the UK and Nordic countries) or a top up or supplemental role (as in Canada and France). A single insurer system may also include co-payments in order to send price signals (to guide consumer behaviour) and provide some relief to public budgets.[24]

As a remedy to the problems in the New South Wales health system, in particular with hospitals, Emeritus Professor Wolfgang Kasper from the Centre for Independent Studies has recently proposed introducing a voucher system for financing hospital care.[26] Although his proposal focuses on NSW, implementing it would require major changes at the federal level.

The fundamentals of the scheme are:

Medicare would issue tax-funded patient vouchers that people are able to use in the hospital of their choice (if feasible)

private insurance could be used to pay hospitals that charge higher fees or provide additional services

a government agency would invite hospital managers from public, charitable, and private hospitals to participate in annual bids for publicly funded bed vouchers

hospitals would be required to raise all their income from patient and bed vouchers and other payment for services rendered. They would also be required to quote on the price of hospital treatment prior to admission, in non-emergency cases

hospital boards would be strengthened and given genuine autonomy and decision-making powers

over time, direct budget allocations would be reduced to nil.

Professor Kasper claims that the benefits of such a scheme would be:

that it maintains universality whilst also encouraging efficient, quasi-private production of hospital services

it improves patient choice and incentives to become informed about their health care

greater patient mobility combined with the need to earn voucher income would drive improvements in the public hospital system

the scheme may gradually pave the way for greater individual funding of health care and reduced reliance on governments, and

a drastic reduction in the functions and costs of state health departments and area health services.

The proposals outlined above are all examples of ‘big-bang’ reform that require major structural changes to the Australian health system. Many commentators claim that the prospects of implementing any big-bang reform proposal in Australia are limited. Instead, they advocate an incremental approach to reform. The Chairman of the Productivity Commission, Gary Banks, holds this view. In a recent speech on the cost implications of an ageing population, he outlined various possible policy responses. They included: greater use of co-payments; implementing measures that encourage consumers to be better informed so that better health outcomes can be achieved at a lower cost; placing greater emphasis on prevention; and implementing incentives for providers that increase productivity.[28]

Professor Stephen Duckett, one of the Commissioners on the National Health and Hospital Reform Commission (NHHRC), also argues in favour of incremental reform. In a recent paper, he outlined a number of smaller-scale reforms that, if implemented, may improve the equity, quality and safety, efficiency, and acceptability of the health system. They include proposals to: clarify the roles of the Commonwealth and state governments; place more emphasis on out of hospital care; renew and sustain a focus on safety issues at the local level (e.g. programs aimed at culture change in clinical settings); put more emphasis on case-mix funding arrangements; and develop new team based models of primary medical care.[29]

The House of Representatives Standing Committee on Health and Ageing that investigated health funding in 2006 came to the same conclusion. It its report, the Committee outlined the views of some experts who made presentations to the inquiry opposing the idea of implementing radical reforms. Amongst them was Dr John Deeble, a co-architect of the original Medibank scheme along with Dr Richard Scotton. Dr Deeble argued that: there was not universal support for moving to a different funding model; there were dangers in shifting responsibility to the Commonwealth, particularly because it was so far removed from the delivery of services; and the states were unlikely to agree to any proposal that curtailed their role in the delivery of health services.

While the Committee acknowledged there were some benefits to implementing radical reforms (for instance, greater accountability if one minister took responsibility for health), it came to the conclusion that an incremental approach was more desirable. It highlighted certain areas where the federal and state governments could work together to introduce reforms. They included:

strengthening primary care and providing more incentives to promote ‘wellness’

The Rudd government has acknowledged the need for major changes to the Australian health system and established the NHHRC in February 2008 to oversee the reform process. Its two main objectives are to:

advise the government on a framework for the new AHCAs that includes robust performance benchmarks (agreements have been reached but are not yet publicly available)

develop a blue-print for long-term reform of the Australian health system.

The Commission was asked to look at many of the issues previously identified in The Blame Game report from the House of Representatives Standing Committee on Health and Ageing, including: reducing cost-shifting, better integrating care, and placing more emphasis on prevention.[31]

In its first year, the Commission has:

released a report, Beyond the Blame Game, which outlined possible accountability and performance benchmarks for the new AHCAs[32]

undertaken extensive consultation that included a series of forums with frontline health workers, government agencies and community members, and issuing a call for public submissions (over 500 were received)[33]

produced a consolidated report outlining the main issues raised in forums[34]

commissioned 19 discussion papers on a range of health topics, such as oral and dental health, primary and community care, prevention and health promotion, Commonwealth-State relations, and the public-private mix in health. Many of these papers outline reform options.[35]

The NHHRC is due to release an Interim report that will outline its long-term health reform plan for the Australia health system on 16 February 2009.

As can be seen from the above, there are strong voices on both sides of the ‘big-bang versus incremental reform’ debate. Those in favour of large, structural change highlight the necessity of fundamental change necessary to deal with deep-rooted problems. There are clear political and structural challenges associated with any change of this type. Those favouring incremental change tend to highlight the dangers of large-scale change (including, for example, the loss of some of the good features of the current system). However, a possible consequence of incrementalism is that the health system continues to simply ‘muddle through’, resulting in the continuation or even exacerbation of current problems.[36] Either way, the intended direction of any change in the Australian health system under the Rudd Government is likely to become clearer following the Government response to the NHHRC Interim report.

[1]. The current AHCAs are due to expire on 30 June 2009. At the November 2008 Council of Australian Governments Meeting, the National Healthcare Agreement was signed, which will replace the AHCAs.

[2]. For further information on cost-shifting in health, see the Parliamentary Library Research Note on this issue, L. Buckmaster and A. Pratt, Not on my account! Cost-shifting in the Australian health system, Research Note No.6, 2005-06, Parliamentary Library, 2 September 2005. Available at: http://www.aph.gov.au/library/Pubs/rn/2005-06/06rn06.htm.

[3]. M. Steketee, ‘Paying for patients not a virtue’, Australian, 21 October 2004.

[27]. J. Oberlander, ‘Remaking Medicare: The Voucher Myth’ in V. Navarro (ed), The Political Economy of Social Inequalities: Consequences for Health and Quality of Life, New York Baywood, 2001, pp 293-310.